Master Thesis TNT Post Parcel Service MSc Technology Management

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Master Thesis

TNT Post Parcel Service

MSc Technology Management

How can the purchasing department of TNT Post

Transport prepare itself for 2015?

Student: H.J.M. Hemmes (hemmohemmes@hotmail.com)

Study coordinator: Prof. Dr. D.J.F. Kamann (d.j.f.kamann@rug.nl) Study co-assessor: Dr. Ir. H. van de Water(h.van.de.water@rug.nl) Coordinators TNT: P. Bangma (pascal.bangma@tntpost.nl)

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Management Summary

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Preface / Acknowledgement

After more than seven years of studying at the University of Groningen I would like to take this moment to thank everybody who has helped me during my studies and especially this research. I would like to thank my supervisor dhr. Kamann for his advice and flexibility in his time schedule, and allowing to discuss by phone which saved me quite some trips to Groningen. Also I would like to thank dhr. Van de Water for taking the time to be my co-assessor.

During the months I was writing my thesis I had the full support of everybody at TNT Post Parcel Service. Thank you all for making my internship possible, providing me with a great time in Hoofddorp and answering all my questions, surveys and interviews in particular Mark, Leo, Marcel, Marnix, Hein, Lodewijck, Frank, Jasper and Laurens. I would especially like to show my gratitude to Pascal, thank you for all your help, guidance and your good advice. It was great having you as a supervisor! In addition I would like to thank Wietske for helping me in the beginning of my research and Nanette for assisting me when Pascal was away.

Further, I would like to thank my parents, sisters and especially Carlijn for encouraging me all these years and in particular the last months, helping me with the final review and

supporting me all the way through! Amsterdam, April 2011

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1. Introduction

Organization structure TNT N.V.

TNT is in the business of transferring goods and documents around the world tailored to its customers’ requirements, with a focus on time-definite and/or day-definite pickup and delivery. It is TNT’s business to deliver the “business” of its customers at the right time and at the right place. TNT is responsible for collecting, transporting, sorting, storing and

delivering documents, parcels and freight, making use of a physical infrastructure consisting of warehouses and vehicles, an electronic infrastructure such as billing and track & trace systems and a commercial infrastructure to assist existing and new clients. TNT N.V., through its two divisions Express and Mail, is part of the global transportation and distribution industry, a major industry with an estimated value of more than $3.500 billion. TNT N.V. is active in over 200 countries and employs approximately 160.000 employees. In 2009 the listed company TNT achieved a turnover of €10.4 billion, the operating income totaled €648 million and cash resulting from operations €1 billion.

TNT has a long history spanning over more than 250 years. Its Dutch roots began in 1752 when the state obtained the right to operate postal services, which resulted in the

establishment of Statenpost. In the Postal Act of 1850 it was explicitly stated that the postal service existed to serve the public interest to ensure the company resembled a transport company working for the public instead of a tax raising organization. In 1928 the official name was changed to ‘Staatsbedrijf der Posterijen, Telegrafie en Telefonie’ (PTT), a well known name in the Netherlands, which would be responsible for the postal, telephone and telegraph services all over the country. The state owned PTT got privatized in 1989 turning into the ‘Koninklijke PTT Nederland N.V.’ (KPN).The company was still required to transport all mail or other consignments with a maximum weight of 10 kilograms inland or abroad. This way the company’s vision would change from a government service in the public interest to a commercial company. In December 1996 the friendly takeover of the Australian company ‘Thomas Nationwide Transport’ (TNT) was completed and the business activities were integrated with the PTT Post division into the ‘TNT Post Groep’ (TPG), which name was changed in 2006 to ‘TNT Post N.V.’. This transition would increase the recognition of the group worldwide by operating under a single brand and to allow more efficient

communication on the various services.

TNT Post Parcel Service (TPPS) operates under the Mail division of TNT Post N.V. as an independent business unit with professional experience in the area of collecting, sorting and distributing parcels. Every day, every address in the Netherlands is reached and

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- 7 - In 2009, the section TNT Post Transport has been fully integrated from TNT Post N.V. into the existing organization of TNT Post Parcel Service. TNT Post Transport is responsible for all transport operations for both TNT Mail (approximately 15 million items daily) and TNT Post Parcel Service (nearly 400,000 parcels per day) across the Netherlands, 24 hours a day 6 days a week. A continues focus on flexibility, reliability, and cost effectiveness of the organization and its employees is essential in its ongoing commitment to operational excellence.

Production Process Parcel Service

The primary process of TNT Post Parcel Service consists of the following sequential steps: (i) collection, (ii) 1st sorting, (iii) exchange, (iv) 2nd sorting, (v) transport, and (vi) distribution. The process is performed from 18.00 until 07.30 to be able to pick up all the parcels during office hours and to make sure the parcels are sorted and delivered before the offices open. There are four sorting centers and 35 distribution centers of

TPPS spread over the Netherlands, as illustrated in figure 1. At the sorting centers, the parcels will be sorted to be transported to a different sorting centre or to a distribution centre. If the parcel is not yet near its final destination the parcel will be exchanged with a sorting centre nearest to its delivery address before going to a distribution centre. At a distribution centre, the parcels will be picked up by couriers who will deliver the parcel to the recipient. Recently a depot has been opened in Utrecht where the sorting and

distribution process have been combined at one single location, removing the second sorting process.

Collection: there are two ways customers can deliver their

parcels to TNT, first by delivering the parcels at one of the 2600 TNT Post Service Points or post offices. This is generally done by customers who want to post a single or small amount of parcels. Secondly, TNT can pick up the parcels at the customer. This is mainly done for big corporate clients who post a large quantity of parcels, for example BOL.com or other web shops.

First sorting: in the first sorting process, the parcels are sorted to be exchanged with one of

the other three sorting centers closer to the destination of the parcel. This happens in three batches spread over the night to ensure an evenly flow of parcels through the sorting process and to be able to spread the arrival en departures of trucks at the sorting centers.

Transport: the parcels will be exchanged between sorting centers by truck. The

transportation is done by two types of trucks, one truck that can transport 30 carts containing parcels or mail, or a truck-trailer combination that can transport 56 carts.

Second sorting: during the second sorting process, the parcels are sorted by region to be

transported to one of the 35 distribution centers nearest to the destination of the parcel.

Transport: the parcels will be exchanged from the sorting centre to the designated

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Distribution: at the distribution centre the parcels will be sorted into by postal area and

loaded on to the smaller courier trucks that will perform the door-to-door distribution to the recipients. The courier services have been outsourced for 85% at subcontractors: individuals who possess their own vehicle and are paid per delivered parcel while operating under TNT representation.

TNT Post Transport

This research is focused on the operations of TNT Post Transport (TPT), which performs all large transport operations for both TNT Mail and TNT Post Parcel Service continuously. Although TNT Post Transport is fully integrated with TNT Post Parcel Service, both TNT Mail and TNT Post Parcel Service are seen as customers of TNT Post Transport. The transport operations consist of providing transportation of approximately 15 million mail items and 400,000 parcels per day between the sorting centers, distribution centers, post offices and various customer sites across the Netherlands, 24 hours a day 6 days a week. Moreover, the parcel distribution industry is growing rapidly. Volumes are growing as a result of growth in e-shopping and as a significant player in consumer delivery in the Netherlands, TPPS benefits from this growth. On the other hand, the mail distribution industry has been declining for quite some time due to the growing use of electronic mail instead of physical mail. Both elements have its effects on the demand for TPT.

The transport industry has been struck hard by the economic crisis. It suffered from a strong decline in cross-border and domestic transport, which resulted in a significant overcapacity of drivers and a substantial drop in productivity. Consequently, the price competition within the industry was very fierce. Now there are predictions that freight transport in Europe will grow strongly over the next decade, but also that there will be a shortage of 55.000 drivers in 2015 due to a extremely high retirement rate, limited new recruits and a scarcity of training spaces.

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2. Research objective and research questions

Motivation

This research will focus on the use and procurement of large transport at TNT Post Transport (TPT). Large transport covers all trucks with or without trailer used for the transportation of mail, parcels or packaging to a customer, post office, distribution or sorting centre. TNT Post Parcel Service (TPPS) wants to develop itself from an executing company to a supervising company by outsourcing parts of its services. As of today several business units of TPPS have been outsourced and further plans to explore the possibilities for the services of TNT Post Transport are in development. Already 40% of TPT’s transport activities are subcontracted to charters. Also, projections of Transport and Logistics Netherlands (TLN) show that in 2015 a shortage of 55.000 drivers is expected due to the aging population and limited new recruits. With an increasing demand for transportation and a growing economy, this will create an enormous shortage of manpower in the transport industry with increasing prices as a possible consequence. This research has been issued to provide a theoretical foundation for TNT to make a strategic decision and to present a recommendation concerning the transport strategy for 2015. A transport strategy is the strategy how the daily transport of mail and parcels between customers, post offices, distribution and sorting centers is performed and by whom (in-house or outsourced). Therefore, the research objective of this thesis is defined as followed:

To determine a transport strategy to prepare TNT Post Transport for 2015 given the three core values reliability, flexibility and cost effectiveness.

This will be done by identifying multiple alternatives. The most suitable option will be determined through a detailed analysis of all possible options and an evaluation based on multiple transport strategy decision criteria. The transport strategy that has the best outcome will be the most suitable alternative.

Research question and sub-questions

An increasing demand for distribution services and a shortage of drivers will create a scarcity in the transportation industry with increasing prices as a possible consequence. In order to meet the research objective stated, the following research question will be answered: “How can the purchasing department of TNT Post Transport prepare itself for 2015 given the

three core values reliability, flexibility and cost effectiveness?”

In order to answer this question, multiple sub problems will be discussed with the help of smaller sub questions. The answer to the research question will be given in the final chapter. The sub questions for this research are:

 What is the current state of the transportation industry?

 What is the current state of TNT Post Transport?

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 What criteria are of importance when evaluating a transport strategy?

 How have competitors organized their logistical services?

 What are potential transport strategies for TPT?

 What transport strategy is most appropriate for TNT Post Transport?

Structure Thesis

An outline will be provided of the way this research project has been conducted and to indicate how the chapters and paragraphs are drawn up in which the sub questions and ultimately the research question will be answered. In the first chapter the current state of the transport industry is described, followed by the current state of TNT Post Transport in the second chapter. The third chapter will provide a theoretical foundation and determines the benefits and drawbacks concerning both outsourcing as insourcing. In the fourth chapter the criteria that are important when evaluating a transport strategy are chosen and

assessed. In chapter five all possible transport strategies are determined and rated by the transport strategy decision criteria. Finally, the results will be discussed and a

recommendation answering the research question will be presented in chapter six.

Methodology

To answer the research question and fulfilling the research objective, various techniques and research methods are used. In chapter 6 the core value costs is further examined with the use of the Total Cost of Ownership theory. Also in chapter 6 the transport strategy evaluation criteria are evaluated with the use of the Analytical Hierarchy Process (AHP) as suggested by literature. Chapter 7 uses the General Morphological Analysis for the exploration of all possible transport strategies. Two surveys are used as quantitative research, one for the ranking of the transport strategy evaluation criteria and one for the evaluation of the potential transport strategies. For the theoretical foundations in this research, papers of academic magazines will be used together with literature found in academic books. Based on this information, for example, the benefits and drawbacks for outsourcing or insourcing the logistical services will be explained or the set of criteria can be developed for making a well-founded transport strategy decision.

Perception

It is important to emphasize that the that the conclusions found in this research concerning the transport strategy evaluation criteria and the final advice concerning the most

appropriate transport strategy will be determined with the use of surveys. These surveys will give an objective result, not primarily based on scientific facts. A consequence of this type of research is that the Thomas theorem (Thomas & Thomas, 1928) has to be taken into

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3. What is the current state of the transport industry and

what are upcoming changes and trends?

Current state of the transport industry

When answering the research question “How can TNT Post Transport prepare itself for 2015” it is important to know in what kind of environment TPT will find itself 2015 and how this environment differs from the current state of the transport industry.

Within the transport sector, the transportation of goods by road benefited most from the global economic growth. The industry was very promising in 2006 and 2007 where turnovers and income increased fast and led to widespread satisfaction. The growth even created a shortage in the ability to fulfill the growing demand and the lack of capacity was enhanced by hard to fill vacancies. After several years of substantial investments in equipment by the transport companies the market balance was restored. This optimistic period has already long exceeded its peak. In 2008 and 2009, the sector was hit hard by the economic crisis and transporters have had to try not to go bankrupt from late 2008 by realizing significant cost savings and drastically reducing their fleet. The Dutch transport sector suffered from a strong decline in cross-border and domestic transport, which resulted in a significant overcapacity of drivers and a substantial drop in productivity. Consequently, the price competition within the industry was very fierce.

These were difficult times for the road transport industry. Now the economy is weak, transporters have become aware of the limitations in the constant rise of demand for their services. The road transport industry is very sensitive to fluctuations in the market because of its dependence on the amount of products companies produce and the resulting trade in these goods. In addition, several other developments are not making life easier for this sector. For example, limited availability of new employees, the fierce competition, increased traffic on the roads and the rising costs of personnel and especially diesel. Particularly the smaller companies are struggling to pass these increased costs to their

customers. Remarkably, the number of transport companies has hardly declined in 2009 despite the deep economic crisis. The transport sector is still largely dominated by family businesses. Nevertheless, a change in structure is occurring with a growth in drivers that start their own company, voluntarily or forced through redundancies. The number of self-employed drivers has been increasing fast in 2010 and

climbed to almost 4,500 as illustrated in figure 2. This is almost 34% of the total number of carriers, an increase of 11% according to Transportation & Logistics Netherlands (TLN), the largest and most prominent national defender of interests in goods transport and logistics services in the Netherlands. This development can be explained by the need for drivers to become more flexible and the

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- 12 - To cope with fluctuating demands numerous companies have created a flexible layer within their workforce. By creating a flexible layer a part of the employees is hired from an

employment agency or as self-employed drivers and are used as flexible staff without a fixed contract. A frequently used ratio between fixed and flexible staff is 40% / 60%. Even with this flexible layer numerous companies were still not able to employ their full workforce due to the decline in demand in 2009. It is a misconception to think that self-employed drivers are no longer needed due to this current decreased demand level. With the lower freight demands there is a higher need for a more flexible workforce for economic reasons. There are always unexpected peaks in demand, unusual shipment size or exceptional destinations for which it is more efficient to outsource. Several major carriers declared that they want to expand their share of charters, often self-employed professionals. It is significant that in the beginning of 2010 the number of businesses (12,235) hardly declined, despite the quick rise in bankruptcies. With the growth of self-employed drivers and all other categories shrinking it suggests that in 2009 the dismissed drivers have started for themselves.

Although there was a significant overcapacity of drivers in mid 2010, the availability of drivers threatens to become a major problem within a few years. Companies should

anticipate on the future as the composition of their total workforce is aging, as illustrated in figure 3. Not all companies have realized this because their attention has been drawn elsewhere concerning the economic situation. However, this does not mean that the structural problem of a shortage in supply of

young employees is of less importance. This year a large group of drivers will go on (early) retirement and this trend will continue for a number of years. According to TLN a critical point will be reached in 2015, there will be a shortage of nearly 55.000 drivers due to a extremely high retirement rate, limited new recruits and a scarcity of training spaces. The overcapacity of the labor market today will therefore be of short duration.

Still, optimism in the potential of the transport industry is high. The transportation of goods has increased sharply over the past decade and is expected to grow further in the coming years. The division of road transport can gain from this. This sector has demonstrated a high quality and a very efficient means of transport in recent years. It is no coincidence that this part of the industry has benefited most from the increased freight of goods. In the EU, road transport increased by about 25% during the period 2000 to 2006, while there was little to no growth in transport by water or rail. It is expected that the transport by road will maintain its strong position within these forms of transportation in the future. TLN predicts that freight transport in Europe will grow strongly over the next decade. The international trade, which until very recently was in a serious dip, is starting to increase and the relocation of production facilities to low wage countries will provide a significant boost in traffic flows.

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4. What is the current state of TNT Post Transport?

The focus of this research will be on the department TNT Post Transport (TPT). TPT is a separate organization within TNT Post N.V. but is fully integrated into the existing organization of TNT Post Parcel Service. TPT has two main customers for which it is responsible for their transport operations: TNT Mail (approximately 15 million items daily) and TNT Post Parcel Service (nearly 400,000 parcels per day). These two customers provide 95% of all the work carried out by TPT. The transport operations consist of providing transportation between the sorting centers, distribution centers, post offices and various customer sites across the Netherlands, 24 hours a day 6 days a week. This is performed by executing four main processes:

 Ordering: consists of receiving and registering customer orders; amounts of mail or

parcels that have to be picked up from a certain location and have to be delivered at a different location at a certain time.

 Planning: is performed on two levels, at strategic and operational level. The strategic

level planning is prepared at a central planning location that carries out the planning on national level and produces a month and a week planning. In these plannings all transport routes are assigned to drivers of TPT or are subcontracted to charters. Operational level planning is the planning of urgent orders (orders that originate and have to be resolved the same day) and the handling of unexpected issues (drivers who do not turn up, trucks that break down and other occasional problems). This planning is carried out at cluster level by the team leaders. TPT has five clusters across the Netherlands, located in Amsterdam, Rotterdam, Den Bosch, Nieuwegein and Zwolle. All clusters are situated at a mail-sorting centre; two are also situated near a parcel-sorting centre.

 Executing: is the process of handing out the route to a specific driver, loading and

unloading of the cargo, driving the actual journey and an evaluation afterwards about the trip with the driver to review possible issues and setbacks during the journey.

 Billing: is the process of sending invoices to charters and processing the costs

incurred.

TNT Post Transport has undergone a reorganization in 2009 to transform TPT’s strategy from a customer-oriented perspective (previously everything was done to keep all customers satisfied, no matter the costs) to an operational excellence perspective pursuing a more result oriented. Continuing the constant strive for operational excellence, TPT wants to develop itself to a supervising company instead of being an executing company; by

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- 15 - subcontracted to charters and no more TPT drivers are recruited. This way the high-priced TPT driver’s are reduced by natural outlet, decreasing the in-house transport capacity of TPT. Although the quantity of mail sent daily in the Netherlands is decreasing, which is

responsible for the largest part of TPT’s transport operations, the amount of parcels send each day is increasing resulting in a slight decline in demand of transport. The decline of TPT’s drivers is not resolved by the decline in total transport demand.

TPT also has to cope with an exceptional demand of transport from its two main customers. The demand for transport runs from 17.00 to 08.00, which makes it hard to ensure TPT drivers eight hours of continuous work. This is an additional reason for TPT to outsource part of its services. Also, TNT Mail is planning to implement changes in the placement of mail sorting centers, which could have its effects on TPT’s daily operations.

Currently TPT employs 496 drivers and owns 210 truck-trailer combinations that are responsible for the execution of 60% of the total workload, 40% of the transport activities are outsourced to more than 200 charters a week on average and are hired by the

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5. Theoretical Background

As previously stated, no long-term strategy regarding the logistical services of TNT Post Transport exists until now. The current strategy is mainly concerned on realizing cost savings in the near future and is not oriented on long-term possibilities. This research project aims to establish a long-term strategy by answering the research question “How can the

purchasing department of TNT Post Transport prepare itself for 2015 given the three core values reliability, flexibility and cost effectiveness?”. The foundation of the answer to this

question lies in the determination of how TNT Post Transport can achieve its corporate success. John Kay (1995) states in “The foundations of corporate success” that corporate success is derived from a competitive advantage which is based on a firm’s distinctive capabilities. A competitive advantage relates to the unique character of a firm's relationship with its suppliers, customers or employees, which must be precisely identified and applied to the relevant markets. Distinctive capabilities as sources of competitive advantage can be separated into four broad categories: architecture, reputation, innovation and strategic assets. Architecture refers to a network of relationships or implicit contracts within or around the firm and adds value by helping to create organizational knowledge and routines.

Reputation is the most important commercial mechanism for transmitting information to

consumers. Although a reputation can be costly and hard to build, when established and maintained it is able to yield a significant added value. By protecting and exploiting

innovation, a company can derive a competitive advantage if it can claim the gains

associated with it. A final potential source of competitive advantage not based on the distinctive capabilities of a firm are the strategic assets that include government-mandated monopolies or other features of market structure which restrict market access by

competitors. Firms that enjoy distinctive capabilities must seek to transform them into competitive advantages.

Although TNT previously had to gain its competitive advantage from their government mandated monopoly when it was still a government service, TNT has been privatized since 1989 turning it into a commercial company. Since then TNT has concentrated on its architecture as the source of competitive advantage. Architecture is one of the three primary sources of distinctive capabilities and refers to a network of relationship contracts within or around the firm. It can be subdivided into internal architecture (relationships with employees), external architecture (relationships with suppliers and customers) and networks (relationships among a group of firms that are performing related activities). The value of architecture rests in the capability of an organization to add value by helping create organizational knowledge and routines that enable the company to respond flexible to changing circumstances and allows easy exchange of information. Architecture depends on the ability of the firm to build and sustain long-term relationships and to establish an

environment that penalizes opportunistic behavior. As with the other distinctive capabilities, it is easier to sustain architecture than to set out to create it (Kay, 1995).

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- 17 - TPT’s internal or external architecture by the examination of outsourcing certain elements of its logistical services to charters, insourcing logistical services by performing more or all logistical services itself or every possible combination in between. Therefore, it is of great importance to determine what the advantages are of each sourcing strategy.

What are the advantages of outsourcing and insourcing?

Outsourcing of services is a matter of careful study and consideration of different cost and service aspects. It cannot be simply arranged and regulated with a cooperation contract. Highly detailed arrangements of procedures, communication, performance and price are necessary. If outsourcing is well prepared and executed, it can be a meaningful solution for all interested parties (Veelenturf & Higler, 1998). A great deal of research has been done on whether and how an outsourcing decision should be made. In this paper, several advantages and disadvantages for both outsourcing and insourcing will be explained based on a

literature research.

Wilding & Juriado (2004) investigated customer perceptions on three key logistics

outsourcing decisions: (i) why to outsource, (ii) what to outsource, and (iii) how to manage satisfaction within third party logistics providers (3PLs) partnerships. Their research revealed that outsourcing in the consumer goods industry is heavily service driven and focused on the traditional logistics functions. They also identified the “outsourceability” of different logistics functions.

As can been seen in figure 4, especially primary transport, secondary transport and fleet management are to be considered for outsourcing. Additional storage during peak periods is out of the scope of this research because it is performed by the sorting and distribution centers that are not part of TNT Post Transport.

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- 18 - In the literature review of Wilding & Juriado (2004) the most important strategic reasons for carriers to be interested in outsourcing their logistics activities were revealed through a Europe-wide postal and telephone survey in addition to an analysis of the current literature. The main reasons mentioned were:

 Cost or revenue related: when outsourcing logistic activities, the company only pays

for transportation that actually took place; fixed costs become variable costs. In addition, financial resources released by outsourcing transportation can be invested in their own company.

 Service related: to be able to provide more specialist services and when the need for

different type of transport changes often on the part of the organization, outsourcing can be cheaper than using in-house transport.

 Operational flexibility related: the carrier can capture the peaks and pits in

transport demands of several companies and can provide a more even supply of transport with a higher and more constant load factor resulting in lower costs per kilometer.

 Business focus related: the company can focus on its core tasks by outsourcing its

non-core business, both financially and in terms of management problems. No effort has to be directed to any additional activities such as the maintenance of vehicles or the complex regulations concerning the length of driving periods and transport permits.

 Transport company competencies related: the larger the carrier the better it will be

able to use their large fleet, expertise, and their prominent role on the transport market to realize or enforce cheaper fares and to ensure more return freights. Furthermore, they are often able to manage their maintenance and staffing more efficiently.

Despite these advantages there are several arguments for companies to decide on private transport (Veelenturf & Higler, 1998):

 The company will not feel dependant to a carrier;

 some shippers, like TNT Post Transport, do not want their property to be

transported together with the goods of competitors and delivered to the customer;

 private in-house drivers feel more involved with the company and its products, so they will have more incentive to deliver a better customer service than an outsider will. This can have great effects on brand integrity;

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 there can also be a loss of direct influence at the point of delivery, which can become an issue as the driver is very often the only direct physical link between the supplier and customer; and

 when outsourcing the logistic activities by using a third party it can lead to a loss of distribution and logistics expertise. This will make it difficult for the company to return the logistic activities to its own operations.

There are also various hybrid forms between fully outsourcing and insourcing the logistical services. Many companies have a private fleet of trucks and drivers that perform the constant demand of transport. The peaks in demand and other services are outsourced to external carriers, just as the current operations of TNT Post Transport. In addition, it is cautious not to outsource exclusively to a single transport carrier. Enabling a company to carry out all logistical activities requires a major commitment to each other to agree on the procedures and schedules and to ensure they are performed at the agreed service levels, not to mention the power and control the transport carrier will obtain over the initial company. The more tasks outsourced to a logistics service provider, the greater the degree of

integration needed regarding planning and procedures. Regular consultation between the responsible management of both companies will be needed (Veelenturf & Higler, 1998). Whether outsourcing, insourcing or the use of a hybrid model is the right step to be taking will be examined with the use of multiple surveys, interviews with various TPT managers and an extensive use of literature. First, we will look at what factors are of importance when making a transport strategy decision, then with a comprehensive analysis all possible transport strategies are determined after which the suitable strategies are assessed by the TPT managers using the transport strategy evaluation criteria. This will indicate a preference for a transport strategy which then its applicability will be examined to TPT’s current

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6. What criteria are of importance when evaluating a

transport strategy?

In this chapter various criteria, which are of importance when evaluating a transportation strategy, will be selected, bearing in mind the numerous advantages and drawbacks of outsourcing the logistic activities of TNT Post Transport. A transport strategy is the strategy how the daily transport of mail and parcels between customers, post offices, distribution and sorting centers is performed and by whom and consists of multiple decisions: (i) the choice of sourcing (outsourcing the logistic services to a logistics services provider, perform in-house or a combination of the two in the form of a hybrid model), (ii) the choice of logistics service provider (one big transport company with national coverage, multiple small carrier companies or numerous individual transporters), and (iii) the choice how the

activities will be separated (by geographic location, length of trip, starting time, structural or incidental planning, etc). The explanation and selection of the possible transportation strategies are performed in the next chapter. For now, the transportation strategy and the logistics service provider stay undetermined.

With the use of the Analytical Hierarchy Process (AHP) it is possible to evaluate several criteria that are of importance when evaluating a transportation strategy and to rank them to see which criteria are of greater influence. The AHP is a decision-making method for prioritizing alternatives, where both quantitative and qualitative factors have to be considered. AHP provides a structured approach for determining scores and assigning weights to different criteria with the use of managerial judgments. The alternative with the highest total weighted score is selected as best (Bhutta & Huq, 2002).

To see what factors influence the decision process on a transport strategy several interviews have been held with managers of TNT Post Transport who are in direct contact of the transport strategy decision and have adequate knowledge of the daily operations of the logistics services of TNT Post Transport. Taking the results of the interviews as an initial foundation, the numerous criteria are identified and further extended with a thorough literature study to provide theoretical support. Some criteria are of greater importance than others and these should weigh more when making the transport strategy decision. To understand these complex relationships, a survey in combination with the Analytic Network Process approach is held to evaluate and rank the different criteria.

Core Values

During the interviews, three core values are identified which determine the operations of TNT Parcel Service and TNT Post Transport: flexibility, reliability and cost effectiveness. From these core values three main categories are formed in which the criteria can be divided:

 Flexibility: is the degree to which a logistics service provider can offer flexible

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 Reliability: is the extent to which it can be relied on that the logistics service

provider will execute the services as agreed, provide a customer focused service, and to what extend long-term cooperation with the carrier is possible.

 Costs: are all distinctive expenses resulting from the logistics services that are of

influence in the decision process of a transport strategy. With the use of Total Cost of Ownership, not only the hourly rate of the carrier determines the costs, but also the indirect costs resulting from the choice of transport strategy such as

implementation costs or costs occurred from reputation damage to the firm are of influence.

When making operational and strategic decisions, all three values are of great importance. Any new transport strategy will have to maximize each of the three core values. However, the values are interrelated which makes it impossible to fully maximize each value without influencing the others. For example, demanding full flexibility can result in higher costs or lower reliability. As such, realizing cost reductions can have a negative consequence for the levels of flexibility or reliability. In addition, fully maximizing the reliability of the services can result in higher costs or lower flexibility. It is vital to find the right balance between the core values to ensure optimal performance, high service levels and competitive prices.

Criteria

Several criteria that form the three main categories have been found using the interviews and an extensive literature research. In appendix I a summary of literature on the different criteria for the selection of a logistic services provider and transport strategy can be found with references to the authors who have identified the variables in their research or survey. The criteria are explained so they are applicable to this research for the evaluation of transport strategies suitable for TNT Post Transport.

Criteria for flexibility:

Flexibility and the parameters that influence the ability to provide flexibility as a logistics provider are seen as a key selection criterion because these providers respond well to unforeseen

situations (Stank & Daugherty, 1996). Also, Noordewier et al (1990) comprised a set of five most important characteristics presented by a logistics provider, one of which was flexibility: the reaction of partners to unforeseen requests for adjustments to the relationship.

 Number of trips: is the flexibility in the number of trips a carrier can make.

 Starting time: is the flexibility in the point of time that a carrier can work. Is the

carrier able to begin trips throughout the day or is he bound to a specific time?

 Truck type: is the flexibility in providing a different type of vehicle, for example a

truck or a truck-trailer combination.

 Reaction occasional / urgent: is the flexibility in responding positively to occasional

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- 22 -

 Hours: is the flexibility in the amount of working hours per week. For example, it is

possible that the carrier is asked to work 10 hours one week and 100 hours the next. Is the carrier capable to meet this flexible demand?

 Geographical spread: is the flexibility in the geographic coverage of the carrier and

thus the flexibility in the routes the carrier can perform. The better the geographical spread, the lesser the distance a carrier has to drive before starting its trip (run up length), as well as the length the carrier has to drive after finishing its trip.

 Alternate transportation: is the flexibility in the ability to organize alternative

transportation in case of vehicle malfunction. Criteria for reliability:

Reliability and the parameters that influence the ability to be reliable as a logistics provider have been extensively reviewed in literature. According to Bradley (1994), a key element when outsourcing logistical functions and developing a sustainable competitive advantage is a reliable supplier that always provides a high level of customer satisfaction so that their clients can become a tougher competitor.

 Operate as agreed: is the extent to which it is expected that the carrier will perform

its services at the agreed service levels, using appropriate equipment and in compliance with laws and regulations.

 Customer-oriented: is the extent to which it is expected that the carrier is involved

with TNT, is customer focused and behaves as a representative of TNT.

 Communication with driver: is the extent to which clear communication is possible

with the driver. The driver must be able to speak and understand Dutch, must be easy to make contact during the trip and it must be possible to give appropriate feedback when needed.

 Willingness: is the extent to which a carrier is willing to improve its services, to

develop cost reductions and capacity expansion or wants to invest in equipment for long-term agreements.

 Stability: is the organizational and financial stability of a carrier, also considering the

future shortage of drivers in the transport market. Criteria for Costs:

The category costs is commonly mentioned as one of the most important criteria, but in literature concerning the evaluation of a logistics provider or transport strategy the different factors influencing the costs are hardly ever described. Instead, the literature is mainly focused on the net price. In this research it is chosen not only to look at the net price of the service, but to look further with the use of Total Cost of Ownership (TCO). TCO is a

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- 23 - cost of buying a particular good or service from a particular supplier. It requires the buying firm to determine which costs it considers most important or significant in the acquisition, possession, and use of a good or service (Ellram, 1995). As such, the category costs consist of:

 Labor costs: is the hourly wage of the driver.

 Fixed costs: are the costs incurred with the depreciation of equipment and fuel.

These are generally equal for each carrier.

 Utilization: to what extent are the incurred indirect costs assigned to TNT? Are these

costs spread over a large number of customers or only assigned to TNT?

 Flexibility costs: are the costs incurred when demanding increased flexibility,

carrying out occasional or urgent trips and the associated extra expenses.

 Reputation damage: are the costs incurred to repair any damage made to the

reputation of TNT Post Transport. If laws and regulations are broken and customers are not treated with care, it can have a negative effect on the brand integrity.

 Control costs: are the costs incurred with purchasing, managing and controlling the

carrier.

 Filling opportunities: is the extent to which the carrier can organize extra work

independently to avoid empty (return) trips.

 Implementation costs: are the costs incurred with the implementation of a new

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- 24 - Interrelatedness of Criteria

As a result of the three core values (flexibility, reliability and costs) being of great influence of each other, the criteria within the categories are also strongly interrelated. To illustrate this, three examples will be explained to demonstrate what the possible consequences are when demanding high levels of one criterion on the rest of the criteria and to show the significant impact that certain strategic decisions can have on the selection process of a transport strategy.

For example, when concentrating on cost effectiveness and trying to cut costs on the operational level of the logistics service, a possible course of action could be to hire low-wage workers abroad; for example truck drivers from Romania or Hungary. This course of action could result in savings in labor costs, but could also have its effects on the reliability of the logistic services. Possibly the foreign drivers are less concerned with the organization then employees who work full time for the company and the drivers do not always speak Dutch. This could have a negative consequence on the ability to communicate with the driver, its customer-orientation, and the extent to which the driver will operate as agreed. Also, an excessive number of mistakes can result in reputation damage of the firm that is highly expensive to repair.

When the organization chooses to concentrate on the ability to provide highest possible service levels, it would want to enlarge the geographical spread of its carriers, increase the filling opportunities and increase the ability of the carrier to arrange alternate transport when material malfunction occurs. Requiring higher service levels of carriers will possibly have an effect on their net price resulting in increased labor costs and flexibility costs. If the organization wants to establish long-term relationships with the logistics service provider, it could be able to increase the number of trips, the variation of working hours and the amount of work the carrier can perform. However, the willingness to cooperate and the financial stability of the carrier are prerequisite conditions with possible consequences on the utilization and implementation costs.

Analytical Hierarchy Process

The Analytic Hierarchy Process (AHP) provides a framework to cope with multiple criteria situations involving intuitive, rational, qualitative and quantitative aspects. AHP was

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- 25 - After its introduction in 1980, AHP has been widely

used in many applications enabling decision-makers to represent the interaction of multiple factors in complex and unstructured situations. The process requires the decision-maker to develop a hierarchical structure of the factors in the given problem and to provide judgments about the relative importance of each of these factors to ultimately specify a preference for each decision alternative with respect to each factor (Bhutta & Huq, 2002). The AHP process is depicted in figure 5.

The managerial judgments to weight the multiple criteria were carried out with the use of an online survey and can be found in appendix II. The survey was distributed among all managers of TNT Post Transport who are in direct contact of the transport strategy decision and have adequate knowledge of the daily transport operations and logistics services of TNT Post Transport. As such, these managers are capable to estimate the various consequences different type of strategies will have on the operations. Also, they have

the knowledge to know which criteria to prioritize when choosing a logistics service provider.

In the survey they were asked to compare two criteria, with their knowledge and

experience, and to indicate which of the two criteria was more important when evaluating a new transportation strategy.

For example first figure on the right indicates that flexibility is extremely preferred to reliability. Or the second figure on the right indicates that reliability is moderately preferred to flexibility.

The results of the survey and the determination of the scores to weigh the multiple criteria can be found in appendix III. The AHP procedure begins with the development of a matrix that compares each criterion with the other criteria within a category. An example of a matrix of the three main categories is given in table X. In general, for any pair-wise comparison matrix, “1’s” are placed down from the upper left corner to the lower right corner. Then, by comparing all criteria using the survey, we fill the rest of the cells. As can be seen in table 1, the results of the survey indicate that reliability is highly preferred above flexibility indicated with a “4”. Using the same scale, costs is extremely preferred to flexibility and reliability is moderately preferred to costs (Bhutta & Huq, 2002).

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- 26 - Flexibility Reliability Costs

Flexibility 1 4 5

Reliability 1/4 1 1/2

Costs 1/5 2 1

Table 1 - Survey results core values

Once these comparisons have been made, the data are computed for the determination of the weights. This process can be summarized in three steps:

1. summing the elements in each column;

2. dividing each value obtained by its column total; and 3. computing row averages (e-vector).

The calculations are also shown in appendix III. For illustration, the results of the pair-wise comparison of the core values with respect to each other are:

Flexibility Reliability Costs

Flexibility 1 0,93 0,67

Reliability 1,075 1 1,25

Costs 1,493 0,80 1

Total 3,568 2,73 2,92

Flexibility Reliability Costs e-vector % #

Flexibility 0,280 0,341 0,229 0,283 28,3 3 Reliability 0,301 0,366 0,428 0,365 36,5 1 Costs 0,418 0,293 0,342 0,351 35,1 2

Table 2 - Calculation comparison of core values

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- 27 - The results of the AHP are displayed in table 3. Remarkable are the low scores of the criteria “alternate transportation” and “truck type” within the category flexibility and the low scores of the criteria “reputation damage”, “control costs”, and “implementation costs” within the category costs. Due to the distinct indication of low importance by the respondents of the survey, these criteria will be discarded from further evaluation of the different transport strategies.

The evaluation of the different transport strategies will be elaborated in the following chapter.

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7. Choice of Transport Strategy

In this chapter, all possible variations of transport strategies for TNT Post Transport are explored and narrowed down. By conducting a market research it is possible to explore the transport strategies carried out in TPT’s surroundings. With the use of GMA all possible transport strategies are explored after which the potential strategies are rated by

performing a second survey. Then the survey results are computed and explained for each core value.

How have competitors organized their transportation?

To be able to look at the logistics process from a wide perspective and to be able to explore the different possibilities how the transport operations of TNT Post Transport (TPT) can be organized, a market research has been conducted. With the market research several transport strategies are identified and certain trends can be indicated how other organizations who deal with daily transport services perform their day-to-day services The market research has been conducted at a number of companies in the consumer goods industry, including several supermarkets, grocery stores, garden centers, home depot centers, hardware stores and fast-food chains. All the organizations deal with daily nationwide transport between warehouses, depots and their stores. The information how these organizations have organized their logistic activities have been gathered through telephone interviews and e-mail correspondence by getting in touch with the transport manager. If this manager could not be reached someone who had adequate knowledge about the current transport operations would suffice. The results of the market research are exhibited in appendix IV, to ensure anonymity for the participating companies their names have been removed. A summary of the results is exhibited in table 4.

Table 4 - Summary market research

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- 29 - characteristics, flexibility and other factors that are of importance to the organization. To determine which factors are critical to TNT Post Transport a survey has been conducted in the previous chapter. The core values identified that determine the operations of TNT Parcel Service and TNT Post Transport are reliability, costs and flexibility.

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What are possible transport strategies?

The market research showed that logistical services can be performed in several different ways, from fully performing the services internally to fully outsourcing its services to an external carrier or a combination of the two. However, when making the choice between which portion of the logistical services is outsourced and which portion is performed internally there are many ways in which the total work package could be divided. For this research, where multiple transport strategies will be compared to each other based on several evaluation criteria, it is essential to discover all these various transport strategies that lie somewhere between performing all logistical services internally or fully outsourcing the logistical services. To do this, an analysis is performed to find out how the work package can be separated to make a choice between what part of the total work package is

outsourced and what part is carried out by the in-house drivers of TNT Post Transport. This analysis is performed by using the General Morphological Analysis (GMA). GMA was developed by Fritz Zwicky as a method for structuring and investigating the total set of relationships contained in multi-dimensional, non-quantifiable, complex problems (Zwicky 1966, 1969). Essentially, GMA is a method for identifying and investigating the total set of possible relationships or configurations contained in a given problem. The approach begins by identifying and defining the parameters (or dimensions) of the problem to be investigated, and assigning each parameter a range of relevant values or conditions (Ritchey 2002). To determine the various parameters of this problem and to make sure all options are

considered, multiple interviews in the form of brainstorm sessions have been held with the transport managers to ensure that no option has been left out. This process has created a comprehensive analysis of how the work package can be divided and eventually consists of all the possible transport strategies for TNT Post Transport out of which one final transport strategy can be chosen. The different categories in which the logistical services can be separated are: (i) carrier type, (ii) order level, (iii) length of the route, (iv) unit level, (v) contract length, (vi) country of origin, and (vii) scope. These categories consist of several options which are stated in table x. A full description of the categories and underlying

options can be found in appendix V.

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- 31 - This model of seven categories with each its own number of options creates a total of 9000 different transport strategies. As an example, three different transport strategies are outlined in figure 6 with the use of GMA.

Blue: all orders are always performed in-house with their own Dutch drivers, trucks and

truck-trailer combinations, and the purchasing, planning and transportation activities are also performed in-house.

Red: the structural orders are performed in-house with their private truck-trailer

combination driven by Dutch drivers. The occasional orders are outsourced to single Dutch drivers with a truck. The purchasing and planning department is performed in-house.

Green: the long routes are performed by foreigners with a truck-trailer combination working

in the Netherlands, who have a contract per assignment with TNT. The short routes are outsourced to a large carrier who will perform the routes in a truck and which is responsible for the purchase of the carriers and the planning.

After all the different transport strategies have been worked out, the alternatives that were unachievable due to impossible or illogical combinations of elements or the strategies that were clearly too expensive have been removed from the total number of alternatives. After that the total number of alternatives has been reduced through consultation of the

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- 32 -

Potential transport strategies for TNT Post Transport

Using the GMA, eight realizable alternatives have been chosen to be used as potential transport strategies for TNT Post Transport to prepare itself for 2015 given the three core values reliability, flexibility and cost effectiveness. These alternatives will be assessed by the transport managers using the criteria found in chapter x. The transport strategies are: #1 – 100% In-house

All logistical activities are performed in-house, no outsourced work.

TNT performs the transport planning and the actual transport itself by employing their own drivers or hiring temporary staff through an employment agency. No charters are taken into service.

#2 – 100% Outsourcing

Complete outsourcing of all logistical activities.

All transport planning and transportation activities are outsourced at three to five major carriers with nationwide coverage. TNT specifies the planning of the amount of carts containing mail or parcels that have to be transported from sorting centers to distribution centers, service points, post offices or customers. The carriers make their own trip planning (the planning of which truck must be on what location with a certain cargo on a specific time) and are responsible for the execution of the planning. Thus all activities are

outsourced, TNT only acquires the carriers. The current staff of TPT might be accommodated among the carriers.

#3 – Directing model

Outsourcing all transport activities, trip planning is performed in-house.

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- 33 - #4 – Flexible transport outsourced

Structural orders in-house, outsource occasional orders

Structural orders, repetitive journeys that can be planned well in advance, are distributed as much as possible to TPT’s own drivers. Occasional orders, rush assignments and routes that are not carried out at least once a week for four consecutive weeks, are contracted to charters. This way the fixed demand is performed by in-house drivers and the flexible demand is carried out by charters who can be hired through cargo auctions or by keeping a list of known charters en selling the trips by telephone. Possible charters are all carriers that are able to respond within a short time period and are able to perform in accordance to the quality and price agreements. The planning department of TPT performs the trip planning in-house.

#5 – Flexible transport in-house

Occasional orders in-house, outsource structural orders

Opposite situation to option #4; occasional orders, rush assignments and routes that are not carried out at least once a week for four consecutive weeks, are distributed as much as possible to TPT’s own drivers. Structural orders, repetitive journeys that can be planned well in advance, are contracted to charters. This way in-house drivers perform the flexible demand and the fixed demand is performed by charters. Possible charters are large carriers with nationwide coverage. The planning department of TPT performs the trip planning in-house.

#6 – Import model

Occasional orders in-house, structural orders outsourced to foreign drivers

Occasional orders, rush assignments and routes that are not carried out at least once a week for four consecutive weeks, are distributed as much as possible to TPT’s own drivers.

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- 34 - #7 – Short distribution model

Short routes in-house, outsource long routes

Short routes from sorting centers to distribution centers, service points, post offices or customers are distributed as much as possible to TPT’s own drivers. Long routes between sorting centers are performed comparable to a shuttle service by charters. The purchasing and planning department of TPT performs the purchase of carriers and trip planning in-house.

#8 – Regional outsourced model

Long routes in-house, outsource short routes

Long routes between sorting centers are performed comparable to a shuttle service by TPT’s own drivers. Short routes from sorting centers to distribution centers, service points, post offices or customers are performed as much as possible by local charters who are

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Purpose and implementation survey

To be able to answer the research question “How can TNT Post Transport prepare itself for

2015 considering the core values flexibility, reliability and cost awareness” an ideal transport

strategy is sought to prepare TPT for 2015. First, all criteria influencing the transport strategy decision have been discovered and ranked to see which criteria should weigh more when making a transport strategy decision. Secondly, all possible transport strategies have been discovered and reduced to eight potential transport strategies. Now, with the use of a second survey, all transport strategies will be rated to the criteria found in chapter x to see how each strategy is valued per criteria. With these ratings all strategies can be compared to each other but it can also be seen what strategies score higher on various areas and the benefits and drawbacks of each strategy can be determined. Finally, the strategy that fits best in relation to the ranking of the core values is able to be determined.

The rating of the transport strategies using the decision criteria will be performed by the same transport managers who completed the first survey to ensure that the definitions of the decision criteria are known to the respondents of the survey. These managers of TNT Post Transport are in direct contact of the transport strategy decision and have adequate knowledge of the daily operations and the logistics services of TNT Transport to ensure that they are able to estimate the characteristics of the potential transport strategies. The online survey can be found in appendix VI, an example of how the rating method proceeded is illustrated in figure 7.

All transport strategies are rated with a score of 1 to 5 with respect to the decision criteria, in this case the criteria that form the core value flexibility. In the example the rating of the first strategy has been completed. A score of 1 indicates a low flexibility of the criteria listed on top in relation to the transport strategy. A score of 3 indicates that the criterion does not affect the strategy. A score of 5 indicates a high degree of flexibility of the criteria listed on top in relation to the transport strategy. This process has been repeated for all three core values and their underlying criteria.

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Computation of the survey results

After all managers of TNT Post Transport have completed the survey, the results were calculated. This was done by taking the average ranking of all criteria in relation to each transport strategy. These average rankings are processed in a matrix, an example for the core value flexibility is shown in figure 8. The full matrix can be found in appendix VII, matrix 1. This creates a clear overview to see how each transport strategy is rated in accordance to each criterion and makes it easy to compare the transport strategies with the criteria. By computing the row averages, the transport strategies can be ranked to see what strategy scores highest on each core value category. The highest two scoring strategies are indicated with green, red indicates the two lowest ranked strategies for the core value flexibility.

Figure 8 - Average rankings of the core value flexibility

In addition, the standard deviations are determined to see which factors have been rated consistent (low deviation) and which have high irregularities in their rankings (high

deviation). The results for the core value flexibility are shown in figure 9. A reason for a high deviation could be for example that the background of the respondent does not provide enough insight to estimate the characteristics of the transport strategy or possibly unclear definitions of the criterion or transport strategy. These elements have been avoided as much as possible by providing adequate information and guidance while completing the survey. Still, some elements have a high deviation and these are indicated with a red color to make sure that they are taken into when analyzing the results. Elements with a low deviation are indicated green to point out the high consistency of its ranking. The full standard deviation matrix can be found in appendix VII, matrix 2.

Figure 9 - Standard deviations of the core value flexibility

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- 37 - specific weight on the transport strategy decision. An example of the total score matrix for the core value flexibility is shown in figure 10, the complete matrix can be found in appendix VII, matrix 3. As can be seen the weight (e-vector) of the criterion “reaction

occasional/urgent” for the core value flexibility is 0.3, meaning that this criterion is rated highly important in the first survey compared to the other flexibility criteria. The criterion “geographical spread” has been rated far less important with a weight of 0.15. The results from the second survey, the ratings of the transport strategies compared to the criteria, are multiplied with the weights of the criteria creating a complete matrix with all ratings and weights merged together. With the use of this matrix, the individual ratings of the transport strategies are computed per criterion or per core value to generate an extensive ranking of the strategies.